The FCA published an update on 28 September 2023 on improving the Appointed Representatives (AR) regime through greater use of data, further clarifying what it expects from participating firms based on its 2021 and 2022 data requests and authorisation information collected. Here, we focus on the key insights and messages for investment management ARs.
An AR carries on regulated activity under the responsibility of an authorised firm, known as the principal. The principal firm is responsible for making sure the AR is fit and proper, complies with FCA rules and operates within the scope of its appointment. The FCA found there are currently around 2,900 principals with approximately 35,000 ARs, with the largest active AR populations in the consumer finance, general insurance and protection, and consumer investments sectors.
Investment management ARs
There are 2,600 FCA-authorised investment managers managing around £11 trillion of assets for UK and global clients. The investment manager AR population active on 31 May 2023 was 994, representing only 3% of the total number of ARs but an eye-popping 28% (i.e. more than one in four) of all UK investment managers.
Many of these managers are start-ups using hosting as a regulatory incubator to test new strategies and business models attracted by rapid speed to market and immediate access to an institutional grade regulatory infrastructure. The FCA revealed operating service metrics showing the average time to determine an application to perform an AR controlled function is 25 days, compared to an average of 10 months to become directly FCA authorised.
Enhanced FCA supervision of principal firms
The new FCA rules, which took effect in December 2022, clarify and strengthen the regulatory body’s expectations regarding principals’ oversight of ARs, including making sure they have adequate systems, controls and resources.
Since the FCA’s new AR department started, enhanced supervisory engagement has resulted in principals terminating their relationships with over 1,300 ARs (figures from 1 July 2022 to 31 Aug 2023). Twelve firms have applied for the imposition of requirements to restrict how they carry out their business, and there have been many more informal interventions.
Investment management ARs
The 2018 FCA review of principal firms in the investment management sector highlighted that poorly managed principal firms had not put in place appropriate control and risk management frameworks, including people with sufficient expertise to oversee the alternative investment funds (AIFs) and the activities of the seconded portfolio managers.
The FCA still has concerns about the sector and will continue to assess the risks associated with it. There were four skilled persons reviews of principal firms in the investment management sector throughout the year ending 31 March 2023, which focused on testing governance and systems and controls, including onboarding and monitoring ARs.
Secondment model risks
The FCA has focused on investment managers where ARs are seconded as investment advisers to funds managed by the principal allowing those individuals to carry out regulated activities that the ARs themselves may not be allowed to undertake.
The FCA provided a case study of an AR that stated on its website that it was the investment manager. ARs are permitted to undertake certain regulated activities (arranging and advising) but not others (managing investments or dealing in investments as agent) so the statement was misleading. As a result of FCA supervisory intervention, the principal assessed the fitness and propriety of the individuals, adding them to the FCA Register, and the AR removed the misleading statement from its website.
Principal firms’ oversight of ARs
AR onboarding – adequate checks
The FCA expects principals to carry out appropriate onboarding checks on an AR’s financial position and make sure they have the relevant experience, knowledge and skills to carry out the activities for which they are being appointed. Principals should also carry out appropriate checks to assess each individual’s professional reputation, such as criminal or civil proceeding checks including insolvency, bankruptcy or wind-up orders for previously held directorships. The FCA reported often seeing principals submitting the associated ‘Form A – Application to perform a controlled function’ without declaring their full regulatory history.
The FCA found many examples of poor practices in AR onboarding arrangements. This includes applications partially or inadequately completed, references not asked for or checked, overlooking a lack of experience or knowledge, and not managing conflicts of interest, leading to less rigorous due diligence. Where the FCA has seen significant issues, principal firms have agreed to stop onboarding ARs until these issues are addressed.
AR monitoring – adequate resources
The FCA has found principals with no clear process or structured plans for how they oversee their ARs, as well as cases where monitoring activities are not carried out in sufficient depth, if at all. In these cases, the FCA has required the firms to take a range of actions to address its concerns, for example implementing stronger systems and controls or stopping AR onboarding.
The best firms have been able to demonstrate that they have a structured, clear monitoring plan in place and are following it, including following through on areas of concern with ARs with enough appropriately experienced staff to carry out this oversight.
The FCA found over 70% of principals that reported to offer regulatory hosting services have at least one full-time equivalent (FTE) employee performing oversight for every five ARs in their network. There were some outliers that reported lower levels of principal oversight, and the FCA has challenged these principal firms on whether they can effectively perform their oversight functions with limited resources.
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IQ-EQ is the leading provider of regulatory hosting solutions and AR services in the UK.
The onboarding and monitoring of our ARs is supported by our world-class regtech platform, MaxComplyTM, and beyond our hosting services we have an experienced compliance consulting team to assist firms with the process of FCA authorisation and support those firms once they are regulated. Our AR services are also fully integrated with IQ-EQ’s wider offering, including corporate administration, fund accounting and outsourced CFO services.